Writing an exit strategy to sell the company can seem daunting. But if you break down the process into a few steps and take each step one at a time, you’ll discover just how simple exiting a business can be.
Let’s discuss what an exit strategy is, why you need one, and what the steps are for writing a successful exit strategy for your business.
What is an exit strategy?
Exit strategies, also known as exit plans, are created by investors, and they detail how they plan to divest an investment.
Frequently, the investor is the business owner who is deciding how they eventually want to “exit” the company they built. These plans are typically long term in nature and should be built years before the business owner wants to sell (or leave his or her business).
Why do people need an exit strategy?
An exit strategy helps the investor or business owner focus on the end goal.
The reason behind the exit strategy may be a short-term “push” or a long-term “pull.” The exit plan will vary depending on which reason it is.
Short-term/”push” factors include:
- Business owner or family member has a health issue or other crisis
- Owner fatigue and stress
- No longer enjoying your work; boredom
- Business is in distress
Longer term “pull” factors include:
- Wanting to start a new business
- Spending more time with friends and family
- Traveling, getting healthy, retiring
Having a plan ahead of time can increase the array of options one has at their disposal, even in the event of a short-term “push” event.
If you don’t have a plan put in place and a push event occurs, you may not have adequate time to execute. This is especially true if you don’t have a plan that includes the following:
- strategic buyers
- merge partners
- a family member pass down
- management buy-out agreements
If this ends up happening, you may be forced to sell your company at a lower price than you otherwise would have realized.
Why is an exit plan important?
An exit strategy formulated early on will guide decisions that the business owner or investor will make.
If the goal is to build the company revenues and profits to eventually fund the business owner’s retirement, certain decisions will be made. These decisions will likely be different from an exit strategy that involves passing down the business to a family member. This is because the business owner won’t be anticipating as large of a “cash out” from a family member as opposed to a strategic buyer.
Exit strategies are also helpful in the event of a business downturn (either due to economic or market conditions or profit losses).
As another example of why an exit plan is important, a business owner or family member could face a health crisis. This could mean they’re unable to continue contributing to the business and may end up needing cash from the business to cover related expenses.
In situations like this one, a “back up” exit strategy would be helpful and relieve a great deal of stress.
What are the steps for writing an exit strategy?
- Prepare an accurate account of your finances.
90% of business owners’ wealth is tied up in their businesses. Ultimately, this means that business owners need to realize as much value as possible from their business exit. This will allow them to continue to fund their lifestyle even after they divest their business (especially if they plan to retire and no longer draw a salary).
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- Evaluate your exit strategy options.
Below are a few reasons owners and investors may want to exit a business (along with the most frequent strategies used):
- Retiring: Sell or transfer to family
- Doing Something Else: Bring in a CEO/COO to operate the business, sell or liquidate
- Health Reasons: Liquidate, sell, transfer to family, or management buy-out
- Determine the value of your company by working with professional business valuation experts.
Is your company optimized in terms of valuation or could improving a few key areas of operations, finance, etc. over another 24 months improve the value you could receive? If so, you may want to consider committing to these improvements rather than exiting right away (if that is an option).
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- Decide what role, if any, you want to play in the business after your official exit.
Are you comfortable financing any of the purchase for the buyer? Do you want to continue working for the organization in a lesser role? What about as a shareholder while continuing to run the organization until an acquirer wants to sell? Maybe you just want to consult with them for a short amount of time? These are things you’ll need to decide as you write an exit strategy.
- Decide your exit strategy depending on your cash needs and desire for continued involvement in the business.
Cash needs will steer you to selling to a strategic buyer or liquidating assets. If you are willing to continue in the business, options such as re-capitalization, management buy-out, transferring to family and staying on as Chairman CEO/COO in the event of a private equity investment come into play.
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- Advise investors and key stakeholders, as well as family members and employees of your exit strategy.
- Choose succession leadership and allow plenty of time for training.
Need help writing an exit strategy?
Every business needs a well-formulated exit strategy. This plan will help establish the smoothest transition possible in the event of a crisis or sudden business decision.
On top of this, the exit strategy can guide both business and personal decisions for the business – all while maintaining steadfast focus on the end goal.
If you need help moving through a business exit strategy, a business exit professional can help:
- Create the right strategy
- Determine the current value of the organization
- Optimize business processes, finances and people to ensure you meet your goals
If you’re ready to get started with your exit plan, give us a call or reach out to us online. We’d love to talk.